Three years on from the 2008 financial crisis, the world economy is tottering on the brink of another serious downturn. Of the major economies Britain has been doing the least well, with three successive quarters of flat economy. The Bank of England has finally responded with its second round of quantitative easing (QE), but by launching it earlier and on a larger scale than expected it has implicitly admitted how desperate it thinks Britain's prospects are. More important, it has revealed that there is really no other weapon left in the country's policy arsenal.

Yet the arsenal is bare mainly because the coalition government has thrown away most of its weapons. It has committed itself to a radical fiscal retrenchment and refused to tax the financial sector more heavily, so it cannot use fiscal policy to reboot the economy. Being ideologically against state ownership, it will not even use its status as the dominant shareholder of RBS, Lloyds TSB and Northern Rock to tell them how to run their businesses. Directing the credits of these banks to where they are most needed, especially when combined with a new national investment bank (as suggested by Robert Skidelsky and Felix Martin), would have been much more effective than flushing the system with liquidity via QE and hoping that some of it sticks where it is needed.

The coalition is not the only government that has become the prisoner of its own ideologies. The victory of the Republican anti-government ideology over a weakened Barack Obama has locked the US into the prison of fiscal rectitude. And this despite the continued willingness of the rest of the world to allow it to have high budget deficits, as shown by the fact that its downgrade by ratings agency S&P has increased the demand for government bonds.

Meanwhile the eurozone is poisoning itself with a cocktail of 18th-century ideas of responsibility and internal division. The fact is that, despite its situation regularly being described as a fiscal crisis, the eurozone as a whole actually does not have one. The budget deficit of the zone is only about 6% of its GDP, as against the 10-11% of the US and Britain. And with the partial exception of Greece, whatever fiscal crises there exist are due to a recession-driven fall in tax revenue and bank bailouts, rather than overspending. Before the crisis, countries like Spain and Ireland used to run budget surpluses equivalent to between 2-3% of GDP, and budget deficits in Italy and Portugal were, at 1.5%-4% of GDP, entirely manageable.

In the event the leaders of countries with stronger fiscal positions, egged on by the financial lobby, have taken the view that "irresponsible" southerners living beyond their means should be punished for their failures, and thus imposed the whole burden of adjustments on them. It took more than a year of economic battering to force them to accept that the situation won't be resolved unless the lenders also share the burden through debt restructuring.

Of course many banks from core countries have heavily invested in the government bonds of the peripheral eurozone countries. So, forcing the creditors to take a hit will transfer the crisis from the public sector of the peripheral countries to the financial sectors of the core ones. This they can ill afford, so political leaders are hatching plans to recapitalise their banks ahead of sovereign debt restructuring. However, it is unclear whether they can come up with a sufficiently large and credible plan in time that also attaches conditions strong enough to change the "irresponsible" behaviours of the recapitalised banks.

So with Japan still reeling from its two "lost decades" (drenched in QE), the only hope seems to be the emerging economies, such as China, India, Brazil and South Africa. Yet can they save us from worldwide economic stagnation? The answer is a definite no. Even with three decades of growth and 1.3 billion people, China's economy is still just over 8.5% of the world's (as of 2009), so whatever it does pales in significance compared to what goes on in the rich world. Moreover, it faces the challenges of deflating its huge property bubble without creating a financial crisis and managing its intensifying social conflicts – it experiences thousands of riots and strikes every year. And its dependence on exports makes it vulnerable to crises in the rich world.

As for India and Brazil, they are still small fries, with 2.2% and 2.7% of world output, while South Africa, with 0.5% of world output, is a mere smudge on the world economic map. All these countries also suffer from huge internal tensions due to high inequality and, in the case of India, growing corruption.

So it is doom and gloom all round, unless the rich world abandons its 18th-century economic ideas and begins to do the "right" things – deliver credits where they are needed, increase public spending in key areas (for infrastructure, research and jobs) and introduce more than cosmetic financial reforms.

Unfortunately such action seems unlikely, not least because of the power of the financial lobby. Perhaps the crisis needs to become deeper before our leaders are compelled to act. But by then they will have created so much unnecessary human suffering and despair.